Public expectations about inflation worsened in August, for the tenth successive month, making it harder for policymakers to cut interest rates any time soon.

Responses to a Lloyds TSB survey, in which people were asked to predict the inflation rate in 12 months' time, averaged 5 per cent, up from 4.8 per cent in July.

The Bank of England keeps close tabs on public inflation expectations because they can feed through into higher wage demands, which in turn boost inflationary pressures.

Trevor Williams, a Lloyds economist, said that the recent price cuts at petrol pumps had so far had no effect on dampening consumers' inflation expectations.

This would be of urgent concern to the Bank, which aimed to keep inflation at 2 per cent, he said. The present targeted rate has blown out to 4.4 per cent.

“If inflation expectations continue to grow, bringing down actual price inflation is going to be increasingly difficult,” Mr Williams said.

Most economists think that the Bank of England will hold the base rate at 5 per cent for the rest of the year, in spite of growing evidence of a rapidly deteriorating economy: revised GDP figures on Friday showed that the economy had ground to a halt in the second quarter, suggesting that it could well be in recession now.

Economists at the Item Club think tank urged the Bank yesterday to ignore the slump in sterling.

The Bank is sensitive to any fall in the pound because of its tendency to exacerbate inflation. Sterling has fallen to its lowest against the dollar in two years.

Item argued that falling commodity prices in dollar terms and the relative modesty of pay settlements thus far would offset the inflation danger.

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